1. Definition. A refinancing is a new transaction
requiring a complete new set of disclosures. Whether a refinancing has
occurred is determined by reference to whether the original obligation
has been satisfied or extinguished and replaced by a new obligation,
based on the parties' contract and applicable law. The refinancing may
involve the consolidation of several existing obligations, disbursement
of new money to the consumer or on the consumer's behalf, or the
rescheduling of payments under an existing obligation. In any form, the
new obligation must completely replace the prior one.

 Changes in the terms of an existing obligation, such as
the deferral of individual installments, will not constitute a
refinancing unless accomplished by the cancellation of that obligation
and the substitution of a new obligation.

 A substitution of agreements that meets the refinancing
definition will require new disclosures, even if the substitution does
not substantially alter the prior credit terms.

2. Exceptions. A transaction is subject to
§ 226.20(a) only if it meets the general definition of a refinancing.
Section 226.20(a)(1) through (5) lists five events that are not treated
as refinancings, even if they are accomplished by cancellation of the
old obligation and substitution of a new one.

3. Variable rate.

i. If a variable-rate feature was properly disclosed under the
regulation, a rate change in accord with those disclosures is not a
refinancing. For example, no new disclosures are required when the
variable-rate feature is invoked on a renewable balloon-payment
mortgage that was previously disclosed as a variable-rate transaction.

ii. Even if it is not accomplished by the cancellation of the old
obligation and substitution of a new one, a new transaction subject to
new disclosures results if the creditor either:

A. Increases the rate based on a variable-rate feature that was
not previously disclosed; or

B. Adds a variable-rate feature to the obligation. A creditor
does not add a variable-rate feature by changing the index of a
variable-rate transaction to a comparable index, whether the change
replaces the existing index or substitutes an index for one that no
longer exists.

iii. If either of the events in paragraph 20(a)3.ii.A. or ii.B.
occurs in a transaction secured by a principal dwelling with a term
longer than one year, the disclosures required under § 226.19(b) also
must be given at that time.

4. Unearned finance charge. In a transaction involving
precomputed finance charges, the creditor must include in the finance
charge on the refinanced obligation any unearned portion of the
original finance charge that is not rebated to the consumer or credited
against the underlying obligation. For example, in a transaction with
an add-on finance charge, a creditor advances new money to a consumer
in a fashion that extinguishes the original obligation and replaces it
with a new one. The creditor neither refunds the unearned finance
charge on the original obligation to the consumer nor credits it to the
remaining balance on
the old obligation. Under these
circumstances, the unearned finance charge must be included in the
finance charge on the new obligation and reflected in the annual
percentage rate disclosed on refinancing. Accrued but unpaid finance
charges are included in the amount financed in the new obligation.

5. Coverage. Section 226.20(a) applies only to
refinancings undertaken by the original creditor or a holder or
servicer of the original obligation. A "refinancing" by any other
person is a new transaction under the regulation, not a refinancing
under this section.

Paragraph 20(a)(1).

1. Renewal. This exception applies both to obligations
with a single payment of principal and interest and to obligations with
periodic payments of interest and a final payment of principal. In
determining whether a new obligation replacing an old one is a renewal
of the original terms or a refinancing, the creditor may consider it a
renewal even if:

 Accrued unpaid interest is added to the principal
balance.

 Changes are made in the terms of renewal resulting from
the factors listed in § 226.17(c)(3).

 The principal at renewal is reduced by a curtailment of
the obligation.

Paragraph 20(a)(2).

1. Annual percentage rate reduction. A reduction in the
annual percentage rate with a corresponding change in the payment
schedule is not a refinancing. If the annual percentage rate is
subsequently increased (even though it remains below its original
level) and the increase is effected in such a way that the old
obligation is satisfied and replaced, new disclosures must then be
made.

2. Corresponding change. A corresponding change in the
payment schedule to implement a lower annual percentage rate would be a
shortening of the maturity, or a reduction in the payment amount or the
number of payments of an obligation. The exception in § 226.20(a)(2)
does not apply if the maturity is lengthened, or if the payment amount
or number of payments is increased beyond that remaining on the
existing transaction.

Paragraph 20(a)(3).

1. Court agreements. This exception includes, for
example, agreements such as reaffirmations of debts discharged in
bankruptcy, settlement agreements, and post-judgment agreements. (See
the commentary to § 226.2(a)(14) for a discussion of court-approved
agreements that are not considered "credit.")

1. Insurance renewal. The renewal of optional insurance
added to an existing credit transaction is not a refinancing, assuming
that appropriate Truth in Lending disclosures were provided for the
initial purchase of the insurance.

20(b) Assumptions.

1. General definition. An assumption as defined in
section 226.20(b) is a new transaction and new disclosures must be made
to the subsequent consumer. An assumption under the regulation requires
the following three elements:

 A residential mortgage transaction.

 An express acceptance of the subsequent consumer by the
creditor.

 A written agreement.

The assumption of a nonexempt consumer credit obligation requires no
disclosures unless all three elements are present. For example, an
automobile dealer need not provide Truth in Lending disclosures to a
customer who assumes an existing obligation secured by an automobile.
However, a residential mortgage transaction with the elements described
in § 226.20(b) is an assumption that calls for new disclosures; the
disclosures must be given whether or not the assumption is accompanied
by changes in the terms of the obligation. (See comment 2(a)(24)-5 for
a discussion of assumptions that are not considered residential
mortgage transactions.)

2. Existing residential mortgage transaction. A
transaction may be a residential mortgage transaction as to one
consumer and not to the other consumer. In that case,
the
creditor must look to the assuming consumer
in determining whether a residential mortgage transaction exists. To
illustrate:

 The original consumer obtained a mortgage to purchase a
home for vacation purposes. The loan was not a residential mortgage
transaction as to that consumer. The mortgage is assumed by a consumer
who will use the home as a principal dwelling. As to that consumer, the
loan is a residential mortgage transaction. For purposes of
§ 226.20(b), the assumed loan is an ""existing residential mortgage
transaction'' requiring disclosures, if the other criteria for an
assumption are met.

3. Express agreement. "Expressly agrees" means
that the creditor's agreement must relate specifically to the new
debtor and must unequivocally accept that debtor as a
primary obligor. The following events are
not construed to be express agreements between the creditor and the
subsequent consumer:

 Approval of creditworthiness.

 Notification of a change in records.

 Mailing of a coupon book to the subsequent consumer.

 Acceptance of payments from the new consumer.

4. Retention of original consumer. The retention of the
original consumer as an obligor in some capacity does not prevent the
change from being an assumption, provided the new consumer becomes a
primary obligor. But the mere addition of a guarantor to an obligation
for which the original consumer remains primarily liable does not give
rise to an assumption. However, if neither party is designated as the
primary obligor but the creditor accepts payment from the subsequent
consumer, an assumption exists for purposes of § 226.20(b).

5. Status of parties. Section 226.20(b) applies only if
the previous debtor was a consumer and the obligation is assumed by
another consumer. It does not apply, for example, when an individual
takes over the obligation of a corporation.

6. Disclosures. For transactions that are assumptions
within this provision, the creditor must make disclosures based on the
"remaining obligation." For example:

 The amount financed is the remaining principal balance
plus any arrearages or other accrued charges from the original
transaction.

 If the finance charge is computed from time to time by
application of a percentage rate to an unpaid balance, in determining
the amount of the finance charge and the annual percentage rate to be
disclosed, the creditor should disregard any prepaid finance charges
paid by the original obligor, but must include in the finance charge
any prepaid finance charge imposed in connection with the assumption.

 If the creditor requires the assuming consumer to pay
any charges as a condition of the assumption, those sums are prepaid
finance charges as to that consumer, unless exempt from the finance
charge under § 226.4.

If a transaction involves add-on or discount finance charges, the
creditor may make abbreviated disclosures, as outlined in
§ 226.20(b)(1) through (5). Creditors providing disclosures pursuant
to this section for assumptions of variable-rate transactions secured
by the consumer's principal dwelling with a term longer than one year
need not provide new disclosures under § 226.18(f)(2)(ii) or
§ 226.19(b). In such transactions, a creditor may disclose the
variable-rate feature solely in accordance with § 226.18(f)(1).

7. Abbreviated disclosures. The abbreviated disclosures
permitted for assumptions of transactions involving add-on or discount
finance charges must be made clearly and conspicuously in writing in a
form that the consumer may keep. However, the creditor need not comply
with the segregation requirement of § 226.17(a)(1). The terms
"annual percentage rate" and "total of payments," when
disclosed according to section 226.20(b)(4) and (5), are not subject to
the description requirements of section 226.18(e) and (h). The term
"annual percentage rate" disclosed under section 226.20(b)(4)
need not be more conspicuous than other disclosures.

20(c) Variable-rate adjustments.

1. Timing of adjustment notices. This section requires a
creditor (or a subsequent holder) to provide certain disclosures in
cases where an adjustment to the interest rate is made in a
variable-rate transaction subject to § 226.19(b). There are two
timing rules, depending on whether payment changes accompany interest
rate changes. A creditor is required to provide at least one notice
each year during which interest rate adjustments have occurred without
accompanying payment adjustments. For payment adjustments, a creditor
must deliver or place in the mail notices to borrowers at least 25, but
not more than 120, calendar days before a payment at a new level is
due. The timing rules also apply to the notice required to be given in
connection with the adjustment to the rate and payment that follows
conversion of a transaction subject to § 226.19(b) to a fixed-rate
transaction. (In cases where an open-end account is converted to a
closed-end transaction subject to § 226.19(b), the requirements of
this section do not apply until adjustments are made following
conversion.)

2. Exceptions. Section 226.20(c) does not apply to
"shared-equity", "shared-appreciation," or "price level
adjusted" or similar mortgages.

3. Basis of disclosures. The disclosures required
under this section shall reflect the terms of the parties legal
obligation, as required under § 226.17(c)(1).

Paragraph 20(c)(1).

1. Current and prior interest rates. The requirements
under this paragraph are satisfied by disclosing the interest rate used
to compute the new adjusted payment amount ("current rate") and
the adjusted interest rate that was disclosed in the last adjustment
notice, as well as all other interest rates applied to the transaction
in the period since the last notice ("prior rates"). (If there
has been no prior adjustment notice, the prior rates are the interest
rate applicable to the transaction at consummation, as well as all
other interest rates applied to the transaction in the period since
consummation.) If no payment adjustment has been made in a year, the
current rate is the new adjusted interest rate for the transaction, and
the prior rates are the adjusted interest rate applicable to the loan
at the time of the last adjustment notice, and all other rates applied
to the transaction in the period between the current and last
adjustment notices. In disclosing all other rates applied to the
transaction during the period between notices, a creditor may disclose
a range of the highest and lowest rates applied during that period.

Paragraph 20(c)(2).

1. Current and prior index values. This section requires
disclosure of the index or formula values used to compute the current
and prior interest rates disclosed in § 226.20(c)(1). The creditor
need not disclose the margin used in computing the rates. If the prior
interest rate was not based on an index or formula value, the creditor
also need not disclose the value of the index that would otherwise have
been used to compute the prior interest rate.

Paragraph 20(c)(3).

1. Unapplied index increases. The requirement that the
consumer receive information about the extent to which the creditor has
foregone any increase in the interest rate is applicable only to those
transactions permitting interest rate carryover. The amount of increase
that is foregone at an adjustment is the amount that, subject to rate
caps, can be applied to future adjustments independently to increase,
or offset decreases in, the rate that is determined according to the
index or formula.

Paragraph 20(c)(4).

1. Contractual effects of the adjustment. The
contractual effects of an interest rate adjustment must be disclosed
including the payment due after the adjustment is made whether or not
the payment has been adjusted. A contractual effect of a rate
adjustment would include, for example, disclosure of any change in the
term or maturity of the loan if the change resulted from the rate
adjustment. In transactions where paying the periodic payments will not
fully amortize the outstanding balance at the end of the loan term and
where the final payment will equal the periodic payment plus the
remaining unpaid balance, the amount of the adjusted payment must be
disclosed if such payment has changed as a result of the rate
adjustment. A statement of the loan balance also is required. The
balance required to be disclosed is the balance on which the new
adjusted payment is based. If no payment adjustment is disclosed in the
notice, the balance disclosed should be the loan balance on which the
payment disclosed under § 226.20(c)(5) is based, if applicable, or
the balance at the time the disclosure is prepared.

Paragraph 20(c)(5).

1. Fully-amortizing payment. This paragraph requires a
disclosure only when negative amortization occurs as a result of the
adjustment. A disclosure is not required simply because a loan calls
for nonamortizing or partially amortizing payments. For example, in a
transaction with a five-year term and payments based on a longer
amortization schedule, and where the final payment will equal the
periodic payment plus the remaining unpaid balance, the creditor would
not have to disclose the payment necessary to fully amortize the loan
in the remainder of the five-year term. A disclosure is required,
however, if the payment disclosed under § 226.20(c)(4) is not
sufficient to prevent negative amortization in
the loan. The adjustment notice must state
the payment required to prevent negative amortization. (This paragraph
does not apply if the payment disclosed in § 226.20(c)(4) is
sufficient to prevent negative amortization in the loan but the final
payment will be a different amount due to rounding.)

1981 changes: While the previous regulation treated
virtually any change in terms as a refinancing requiring new
disclosures, this regulation limits refinancings to transactions in
which the entire original obligation is extinguished and replaced by a
new one. Redisclosure is no longer required for deferrals or
extensions.

The assumption provision retains the substance of § 226.8(k) and
Interpretation § 226.807 of the previous regulation, but limits its
scope to residential mortgage
transactions.

Section 226.21--Treatment of Credit Balances.

1. Credit balance. A credit balance arises whenever the
creditor receives or holds funds in an account in excess of the total
balance due from the consumer on that account. A balance might result,
for example, from the debtor's paying off a loan by transmitting funds
in excess of the total balance owed on the account, or from the early
payoff of a loan entitling the consumer to a rebate of insurance
premiums and finance charges. However, § 226.21 does not determine
whether the creditor in fact owes or holds sums for the consumer. For
example, if a creditor has no obligation to rebate any portion of
precomputed finance charges on prepayment, the consumer's early payoff
would not create a credit balance with respect to those charges.
Similarly, nothing in this provision interferes with any rights the
creditor may have under the contract or under state law with respect to
set-off, cross collateralization, or similar provisions.

2. Total balance due. The phrase "total balance
due" refers to the total outstanding balance. Thus, this provision
does not apply where the consumer has simply paid an amount in excess
of the payment due for a given period.

3. Timing of refund. The creditor may also fulfill its
obligation under this section by:

 Refunding any credit balance to the consumer immediately.

 Refunding any credit balance prior to a written request
from the consumer.

 Making a good faith effort to refund any credit balance
before six months have passed. If that attempt is unsuccessful, the
creditor need not try again to refund the credit balance at the end of
the six-month period.

Paragraph 21(b).

1. Written requests--standing orders. The creditor is
not required to honor standing orders requesting refunds of any credit
balance that may be created on the consumer's account.

Paragraph 21(c).

1. Good faith effort to refund. The creditor must take
positive steps to return any credit balance that has remained in the
account for over six months. This includes, if necessary, attempts to
trace the consumer through the consumer's last known address or
telephone number, or both.

2. Good faith effort unsuccessful. Section 226.21
imposes no further duties on the creditor if a good faith effort to
return the balance is unsuccessful. The ultimate disposition of the
credit balance (or any credit balance of $1 or less) is to be
determined under other applicable law.

References

Statute: § 165.

Other sections: None.

Previous regulation: None.

1981 changes: This section implements § 165 of the
act, which was expanded by the 1980 statutory amendments to apply to
closed-end as well as open-end
credit.

Section 226.22--Determination of the Annual
Percentage Rate.

22(a) Accuracy of the annual percentage rate.

Paragraph 22(a)(1).

1. Calculation method. The regulation recognizes both
the actuarial method and the United States Rule Method (U.S. Rule) as
measures of an exact annual percentage rate. Both methods yield the
same annual percentage rate when payment intervals are equal. They
differ in their treatment of unpaid accrued interest.

2. Actuarial method. When no payment is made, or when
the payment is insufficient to pay the accumulated finance charge, the
actuarial method requires that the unpaid finance charge be added to
the amount financed and thereby capitalized. Interest is computed on
interest since in succeeding periods the interest rate is applied to
the unpaid balance including the unpaid finance charge. Appendix J
provides instructions and examples for calculating the annual
percentage rate using the actuarial method.

3. U.S. Rule. The U.S. Rule produces no compounding of
interest in that any unpaid accrued interest is accumulated separately
and is not added to principal. In addition, under the U.S. Rule, no
interest calculation is made until a payment is received.

4. Basis for calculations. When a transaction involves
"step rates" or "split rates"--that is, different rates
applied at different times or to different portions of the principal
balance--a single composite annual percentage rate must be calculated
and disclosed for the entire transaction. Assume, for example, a
step-rate transaction in which a $10,000 loan is repayable in 5 years
at 10 percent interest for the first 2 years, 12 percent for years 3
and 4, and 14 percent for year 5. The monthly payments are $210.71
during the first 2 years of the term, $220.25 for years 3 and 4, and
$222.59 for year 5. The composite annual percentage rate, using a
calculator with a "discounted cash flow analysis" or "internal
rate or return" function, is 10.75 percent.

5. Good faith reliance on faulty calculation
tools. Footnote 45d absolves a creditor of liability for an error
in the annual percentage rate or finance charge that resulted from a
corresponding error in a calculation tool used in good faith by the
creditor. Whether or not the creditor's use of the tool was in good
faith must be determined on a case-by-case basis, but the creditor must
in any case have taken reasonable steps to verify the accuracy of the
tool, including any instructions, before using it. Generally, the
footnote is available only for errors directly attributable to the
calculation tool itself, including software programs; it is not
intended to absolve a creditor of liability for its own errors, or for
errors arising from improper use of the tool, from incorrect data
entry, or from misapplication of the law.

Paragraph 22(a)(2).

1. Regular transactions. The annual percentage rate for
a regular transaction is considered accurate if it varies in either
direction by not more than 1/8 of 1 percentage point from the
actual annual percentage rate. For example, when the exact annual
percentage rate is determined to be 101/8%, a disclosed annual
percentage rate from 10% to 101/4%, or the decimal equivalent,
is deemed to comply with the regulation.

Paragraph 22(a)(3).

1. Irregular transactions. The annual percentage rate
for an irregular transaction is considered accurate if it varies in
either direction by not more than 1/4 of 1 percentage point from
the actual annual percentage rate. This tolerance is intended for more
complex transactions that do not call for a single advance and a
regular series of equal payments at equal intervals. The 1/4 of
1 percentage point tolerance may be used, for example, in a
construction loan where advances are made as construction progresses,
or in a transaction where payments vary to reflect the consumer's
seasonal income. It may also be used in transactions with graduated
payment schedules where the contract commits the consumer to several
series of payments in different amounts. It does not apply, however, to
loans with variable rate features where the initial disclosures are
based on a regular amortization
schedule over the life of the loan, even
though payments may later change because of the variable rate feature.

22(a)(4) Mortgage loans.

1. Example. If a creditor improperly omits a $75 fee
from the finance charge on a regular transaction, the understated
finance charge is considered accurate under § 226.18(d)(1), and the
annual percentage rate corresponding to that understated finance charge
also is considered accurate even if it falls outside the tolerance of
1/8 of 1 percentage point provided under § 226.22(a)(2).
Because a $75 error was made, an annual percentage rate corresponding
to a $100 understatement of the finance charge would not be considered
accurate.

22(a)(5) Additional tolerance for mortgage loans.

1. Example. This paragraph contains an additional
tolerance for a disclosed annual percentage rate that is incorrect but
is closer to the actual annual percentage rate than the rate that would
be considered accurate under the tolerance in § 226.22(a)(4). To
illustrate: in an irregular transaction subject to a 1/4 of 1
percentage point tolerance, if the actual annual percentage rate is
9.00 percent and a $75 omission from the finance charge corresponds to
a rate of 8.50 percent that is considered accurate under
§ 226.22(a)(4), a disclosed APR of 8.65 percent is within the
tolerance in § 226.22(a)(5). In this example of an understated
finance charge, a disclosed annual percentage rate below 8.50 or above
9.25 percent will not be considered accurate.

22(b) Computation tools.

Paragraph 22(b)(1).

1. Board tables. Volumes I and II of the Board's
Annual
Percentage Rate Tables provide a means of calculating annual percentage
rates for regular and irregular transactions, respectively. An annual
percentage rate computed in accordance with the instructions in the
tables is deemed to comply with the regulation, even where use of the
tables produces a rate that falls outside the general standard of
accuracy. To illustrate:

 Volume I may be used for single advance transactions with
completely regular payment schedules or with payment schedules that are
regular except for an odd first payment, odd first period or odd final
payment. When used for a transaction with a large final balloon
payment, volume I may produce a rate that is considerably higher than
the exact rate produced using a computer program based directly on
appendix J. However, the volume I rate--produced using certain
adjustments in that volume--is considered to be in compliance.

Paragraph 22(b)(2).

1. Other calculation tools. Creditors need not use the
Board tables in calculating the annual percentage rates. Any
computation tools may be used, so long as they produce annual
percentage rates within 1/8 or 1/4 of 1 percentage point,
as applicable, of the precise actuarial or U.S. Rule annual percentage
rate.

22(c) Single add-on rate transactions.

1. General rule. Creditors applying a single add-on
rate to all transactions up to 60 months in length may disclose the
same annual percentage rate for all those transactions, although the
actual annual percentage rate varies according to the length of the
transaction. Creditors utilizing this provision must show the highest
of those rates. For example:

 An add-on rate of 10 percent converted to an annual
percentage rate produces the following actual annual percentage rates
at various maturities: at three months, 14.94 percent; at 21 months,
18.18 percent; and at 60 months, 17.27 percent. The creditor must
disclose an annual percentage rate of 18.18 percent (the highest annual
percentage rate) for any transaction up to five years, even though that
rate is precise only for a transaction of 21 months.

22(d) Certain transactions involving ranges of balances.

1. General rule. Creditors applying a fixed dollar
finance charge to all balances within a specified range of balances may
understate the annual percentage rate by up to eight percent of that
rate, by disclosing for all those balances the annual percentage rate
computed on the median balance within that range. For
example:

 If a finance charge of $9 applies to all balances between
$91 and $100, an annual percentage rate of 10 percent (the rate on the
median balance) may be disclosed as the annual percentage rate for all
balances, even though a $9 finance charge applied to the lowest balance
($91) would actually produce an annual percentage rate of 10.7 percent.